We’ve heard of stocks that are falling knives. Frontier Communications Corp (NASDAQ:FTR) lately seems like a tumbling machete. Catching it in an investment portfolio could be hazardous. But I need a speculative trade, so I want to risk a little to capture a potential move on earnings.
Technically, FTR stock is not inviting. Its seems like it’s in a loop of perpetual lower lows and lower highs.
Frontier Just recently caught a high-profile downgrade from Citigroup with a price target of $1.75. Fundamentally, there are concerns over its balance sheet and stiff competition. It’s never a great scenario when finances are in question especially when the company is in a competitive arena.
The Thesis: Since this is taken as a speculative trade, I accept the associated risk and therefore keep it small; I risk enough to not break either my heart or my piggy bank. My aim is to capture a potential move from the earnings event in early May.
The Bet: Buy the FTR Aug $2.50 call for 15 cents per contract. This is my maximum risk. Ideally, I need FTR stock to rally past the open gap just below my debit call.
Usually I like to sell downside risk to finance my bet. In this case, I hesitated at first because I saw no proven value below current levels. So I decided to use other people’s homework. The lowest price target is $1.50 per share, and that’s where I will commit capital … but I will be careful not to turn a trade into an investment.
The Bank: Sell FTR Nov $1.50 puts for 15 cents per contract to completely finance my bet. By selling the naked put, I am committing to owning Frontier stock at that price if it falls below it.
Taking both trades would put me long FTR for free through August, so long as FTR stock holds above $1.50 share.
Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.